Russkiy Business: Russia’s “Franchise” Diplomacy

By Michelangelo Freyrie

At the end of October, Verona hosted the 11th Eurasian Economic Forum, which was one of 2018’s most anticipated business conferences. The importance of the forum is evident if we consider the participation of VIPs such as Rosneft’s CEO Igor Sechin. His presence has attracted most of the spotlight, mainly because of the recent difficulties encountered by joint ventures between Rosneft and Italian energy company ENI. However, this gathering is not just a photo opportunity and a chance to discuss formal economic cooperation. Events such as the Eurasian Economic Forum are part of a broader strategy which focuses on building personal networks between Russia-oriented entrepreneurs.  These ties are fundamental in compensating for Moscow’s inability to create a positive business environment and attract foreign capital organically. Moreover, these events also aim at filling the gaps in Russia’s wider business diplomacy, which is restrained by the country’s slow progress on market reform.

Between 1995 and 2013, the official policy of the government to attract foreign investments consisted in leveraging the country’s apparent efforts to modernize and to expand its economic infrastructure. The improvement of the business climate relied on schemes established by burgeoning collaborations with the EU or the US, such as the “Partnership for Modernisation.” However, these high-level dialogues faced limits posed by divergent interests. Moscow sought immediate deals that would have facilitated business exchanges, while Brussels was only willing to concede so-called framework agreements – agreements where substantial concessions, such as visa liberalizations, would just be given in exchange for complete adherence to EU standards in the field of human rights and market reform.

An additional impediment to investment is the misuse of bodies such as the  Foreign Investment Advisory Council (FIAC) as tools to legitimize the Russian government’s political priorities, rather than as sources of expertise. FIAC unites several significant foreign investors such as Deutsche Bank or Coca-Cola, and its primary goal is to propose measures to improve the country’s investment climate. In theory, membership in FIAC also allows for privileged access to high-level officials in numerous ministries.  However, reports published by the Council increasingly mirror the slogans that have dominated the Russian economic debate. The organization now serves to validate government policy rather than challenge it. Lack of initiative, political disinterest, and sparring with competing platforms such as the International Council for Cooperation and Investment has dramatically weakened the council, as shown by the low attendance of its meetings.

The decline of FIAC left a vacuum which has been filled by other arrangements: mainly, Roscongress,  a foundation established in 2007 to improve Russia’s “soft power” capabilities.  The body has become a one-stop organizer of congresses and forums, and its board is composed of representatives of big Russian businesses as well as government officials. Because of this, its initiatives such as the Saint Petersburg Economic Forum serve as a useful outlet for the business community to discern government intentions.

Through partnerships and support to local initiatives, Roscongress manages to reach out to foreign enterprises interested in doing business in the country through an impressive, tight-knit network of interest groups and trade associations. In turn, its capacity to exploit spontaneous initiatives determines its importance.

Actors in markets with a weak rule of law, such as Russia, understand the importance of having a strong network of formal and informal contacts.  A study on foreign investments in Russia highlights that companies tend to manage their relations with public officials and civil servants in two ways: they either opt for few, influential contacts on a federal level, or they aim for an extensive network of stakeholders. Empirically, both strategies have proven successful. Where FIAC based its activities on the goodwill of few prestigious contacts, mainly inside ministries and Duma commissions, Roscongress takes advantage of businesses’ desire to create larger networks by granting access to officials from every level of government.

A typical foreign “franchise” operating under the Roscongress umbrella is the Italian Conoscere Eurasia (Know Eurasia) association, the organizers of the Verona Congress. The non-profit organization is guided by leaders of the business community and is chaired by Antonio Fallico who is head of the Russian division at the Intesa San Paolo bank and honorary consul of Russia in Verona. The activities of the association are impactful since it organizes seven to nine congresses a year across Italy; additionally, the non-profit is perceived as a purely national actor which allows its contractors to directly lobby the Italian parliament for better business relations with Russia.

Roscongress’ practice of “subcontracting” diplomatic efforts has obvious advantages from an organizational perspective. Namely, the use of foreign business associations allows Russian diplomats to approach enterprises more effectively, with intermediaries familiar with local business practices and cultures, and for little financial and political costs. Subcontracting also reassures entrepreneurs who could be discouraged by Russian bureaucracy by strengthening informal international networks.  However, overly institutional chambers of commerce often lack the latitude to establish the kind of cross-sectional collaboration necessary to soothe European businessmen. Conoscere Eurasia and Dialogue Franco-Russe, for example, primarily aim to socialize a tight business community which is friendly to Russia through a laid-back atmosphere and cultural initiatives, which is also the reason why many of these organizations tend to host Russkiy Mir cultural centers.

Overall, the collaboration of Roscongress and foreign business networks has become the primary tool to attract investments in the Federation. Nevertheless, despite the efficiency of this arrangement, increasing foreign investment always depends on the overall improvement of the country’s economic infrastructure. A recent report by the Bank of Finland, lamenting the fading relevance of FIAC-style forums, explains that Russia still needs to tackle profound problems affecting its businesses climate. The advantage of centralized and transparent business councils is that they help create a shared vision of the country’s economic future, something that has been neglected by Russian leaders. For foreign actors, investing in a country lacking a long-term agenda is just too risky, regardless of the opportunities it may offer. Can the current system of partnerships contribute to this vision? Hard to say. The hope is that increased involvement by foreign groups will encourage the re-emergence of an alliance for economic modernization.

 

 

 

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